Just as a cricket player might go through a bad patch, economies too can have their downturns. Consider a top-order batsman who has been at the forefront consistently but now hit a rough patch. His form dips and he struggles to even get into double figures.
The UK and Japan, two of the world’s major economies, are currently in a similar situation, having recently slipped into recession. They were definitely not one of the fastest growing economies, but were considered the typical “first world” countries. They are now struggling to even register any positive growth.
The UK story
In the UK, the economy fell into recession at the end of 2023. The Gross Domestic Product (GDP), which is a measure of the total value of all goods and services produced by a country in a specific time period, dropped by 0.3% between October and December 2023.
This was after a fall between July and September 2023. (-0.1%) Two consecutive quarters of de-growth means a technical recession.
The Bank of England, which is the central bank of the UK, has been warned to cut interest rates soon. This is to ease the pressure on households amid the cost of living crisis, which is a situation where the cost of basic goods and services rises faster than wages.
British finance minister Jeremy Hunt has said the economy was turning a corner and that forecasts pointed to stronger growth in the coming years. This statement brings hope and optimism for the future of the UK’s economy.
The Japanese tale
Japan, the Asian giant, also fell into a recession. Its economy shrank for two quarters in a row amid decadal high inflation. (Recent data shows Japan experienced almost 4-decade high inflation in recent times)
The GDP contracted by 0.4% in the last three months of 2023, compared to a year earlier. It shrank by 3.3% in the previous quarter of July-September.
The figures also indicate that Japan has lost its position as the world’s third-largest economy to Germany. It is worried about Yen’s fall and bleak prospects of prolonged slow growth.
What happens to commoners & businesses?
Just as our cricketer would face challenges on and off the field, people living in these countries are facing the impact of the recession. The cost of living can increase further, jobs may be lost or hours reduced, incomes may stagnate or drop, and the unemployment rate may increase.
Businesses usually cut back on production and consumer spending usually decreases during a recession. Finding new employment during a recession isn’t easy, so people are often stuck in unemployment for prolonged periods. Those who were already in a vulnerable situation might be forced into debt by a recession.
How long will the recession last?
The length of a recession depends on a variety of internal and external factors, including the severity of the economic downturn, the response of the government and central bank and global economic conditions.
Recessions can last anywhere from 10 to 11 months on average as per the experiences in the US. However, some recessions have been shorter or longer than these averages. The situation may also vary as per the country-specific conditions in the UK and Japan.
What can be done to get back on track?
Governments typically respond to recessions by adopting a mix of monetary and fiscal policies.
- Central banks can lower interest rates to stimulate economic activity.
- Governments can increase spending and decrease taxation to stimulate demand.
- Central banks can also regulate banks to ensure that they are not required to hold excessive capital.
- Governments often introduce economic stimulus packages during a recession. These can include measures like direct payments to individuals, loans to businesses and increased funding for public services.
Just as a cricketer doesn’t lose his skills overnight, the fundamentals of these economies still have some great plus points. It’s just a phase, a bad patch, which, like all things, can pass.
What next for the economies everywhere?
Negative sentiments should not be allowed to take over in this critical period. As the cricketer needs to keep his spirits up and focus on his game, these economies too, need to stay resilient at such crucial times.
In today’s interconnected world, recession in any one country is not a problem of that country alone, it has the potential to spread across other economies. (EU is already showing some signs recessionary pressures too)
For us, it is thus important to monitor high frequency data points, make calculated moves and protect the downside in such scenarios. (Think of it as guarding your wicket with focus during testing times)
Several economies and the world overall, has bounced back from such severe challenges in the past and can surely weather this storm too!
All we need is agility and resilience in the face of this adversity.
Disclaimer: The above content is for informational purposes only. Not advice. Please consult your financial advisor before taking any investment decision.
